Prices for June 23rd, 2009

Market Review for Tuesday           

IL prices rallied yesterday, partly in reaction to a sharp selloff in the US dollar (see page 7).  The dollar seemed to be trying to construct a major bottom prior to yesterday’s steep decline, and the failure to confirm a recently-formed head & shoulders bottom has to be seen as a major opportunity lost. 

The weakness seen yesterday in the US dollar came in response to strong consumer confidence figures in Germany and in reaction to the start of a two-day Federal Reserve Open Market Committee meeting.  The connection to the dollar runs through interest rates, and most Fed-watchers were talking yesterday about the unlikelihood of any Fed-sanctioned increase in interest rates, any time, soon, and that pulls one source of support out from under the dollar.  Money flows to higher rates.

On Friday, oil prices ignored weakness in the dollar and sold oil prices lower, anyway.  Last night’s API report should offer traders that opportunity again today.  Crude oil stocks barely declined at all in last night’s API figures (see page 6), despite higher utilization and strikingly low crude oil import figures.  Crude imports came in at 8.6 million bpd, according to the API, and that places them almost 1.8 million bpd below the five-year average for this week.  That leaves Opec and oil producers scrambling to find buyers for an extra 12.5 million barrels a week to compensate for lower US refining use.

Despite that fact, refined products inventories grew, according to the API.  These suggested implied demand numbers that are really quite low for this time of year.  If the DOE confirms the figures, traders might ignore the dollar today.

In other news yesterday, Japan imported 18.8% less crude oil and condensate in May than a year earlier, which helped to reduce its expenditure for the month by 63%.  Naphtha and gasoline imports were down 8.1% and LNG imports were 18.9% lower.

Democratic leaders plan to bring the climate bill to a floor vote on Friday, after yesterday agreeing to give the USDA control of the “offset program” which will decide who gets pollution credits and how they get them.    

Technicals

           Oil prices rallied yesterday as the US dollar fell sharply.  We mentioned yesterday that we typically see a bout of short-covering once prices have started to sell off, as stubborn shorts who have held on for weeks see it about to happen all over again and rush to cover shorts.  It can be a last gasp.  It is possible, too, that new buyers came in to push us higher, again.  Fundamentally, that seems unlikely to us, but this market is taking cues from a number of non-oil sources.

Dollars per barrel

Above:  The 7:5+2 crack spread has dropped from $13.56 to $8.78 in the last five days.  That could cut into refining.

August crude oil now has buy-stops over $69.70, $70.30, $72.35, $72.77, $73.25, $76.25, $79.17, and $84.83.  Sell-stops are under $66.35, $65.90, $64.95, $64.65, $62.75, $62.19, $59.50, $56.55, $56.15, $55.46, and $53.50.  July heating oil has buy-stops over 177.66, 180.60, 185.90, 187.45, 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 170.70, 167.80, 162.35, 159.45, 154.75, 153.50, 147.70, 141.30, 140.90, 137.50, 132.00, and 129.50.  July RBOB has buy-stops over 191.32, 193.85, 203.75, 204.36, 207.20, 211.24, 214.00, 222.70, 228.86, 240.10, 250.40, 252.00, 265.10, and 267.85.  Sell-stops are under 183.65, 182.65, 178.00, 167.70, 166.35, 165.00, 163.65, 162.40, 157.50, 156.60, 150.35, and 144.60. 

Football: The bears lost 17 yards yesterday, and that makes it second down, 27 yards to go.  The bears have some work ahead.

Technical Support & Resistance

Aug crude oil                          Support:             $66.35-$66.50, $65.90-$66.10, $64.95-$65.10, $64.65-$64.75, $62.75-$62.90.

                                           Resistance:        $69.60-$69.70, $70.20-$70.30, $72.10-$72.35, $72.63-$72.77, $73.10-$73.25.

Jul heating oil         Support:             170.70-171.00, 167.80-168.00, 162.35-162.45, 159.45-159.60, 154.75-154.90.

                             Resistance:        177.55-177.66, 180.45-180.60, 185.70-185.90, 187.30-187.45, 187.90-188.05.

Jul Rbob                        Support:             183.65-183.75, 182.65-182.80, 178.00-178.20, 167.70-167.85, 166.35-166.50.

                                           Resistance:        191.20-191.32, 193.70-193.85, 203.60-203.75, 204.20-204.36, 207.55-207.63.

Oil Inventory Reports

    We will look at this week’s DOE report for confirmation of last week’s increase in gasoline demand against a year ago.  Stock increases will be seen as being bearish, but we ultimately believe that the four-week demand aggregates and refinery utilization are the keys to the supply and demand picture in this market.  Crude oil stocks should increase this week, historically, but we expect to see another drawdown, because imports are lower than utilization – which is well below the weekly average.

    Distillate stocks are now 34.2 million bbls, or 29.53%, higher than a year ago.  Heating oil inventories are 15.1 mln bbls, or 59.21%, higher than they were a year ago.  Gasoline stocks are 3.3 mln bbls (dn 1.58%) lower against a year ago.  Crude oil stocks are now 57.9 million bbls, or 19.31%, higher than a year ago.  Residual stocks are 3.1 mln bbls (7.58%) lower than a year ago, jet fuel stocks are 1.8 mln bbls, (4.50%) higher than a year ago.  Utilization is 3.40% lower than a year ago and is 7.88% below the eight-year average.  It is 10.10% lower than the five-year, pre-Katrina average. 

                                                                    DOE Weekly Inventory Statistics

Source: US Department of Energy’s Energy Information Administration  

Open Interest Analysis

      Crude oil open interest fell by 23,743 contracts on Monday, when prices were lower.  That looks like long liquidation, which would be supportive.  Longs have been getting out, rather than fresh selling pressing quotes lower.

      Heating oil open interest fell by 1,285 contracts on Monday, when prices were lower.  That looks like long liquidation, which would be supportive.

      RBOB open interest fell by 5,628 contracts on Monday, when prices were lower.  That looks like long liquidation, which would be constructive. 

      Natural gas open interest fell by 3,383 contracts on Monday, when prices were lower.  That looks like long liquidation and is supportive.

Monday’s Open Interest Changes:  

Crude 1,137,773  dn 23,743        Heat 287,650   dn 1,285       RBOB 217,905  dn 5,628       Nat gas 709,441  dn 3,383   

CFTC Commitments of Traders  (for the period ended Tuesday, June 16th)   

As of June 16th:                 Long                   Short:

Crude oil                   201,362               174,932                           -contracts held by speculators:  1.15 long

                                         614,337               660,678                               held by the trade

                                         102,922                 83,011                               held by small specs and hedgers.

Spreads….dn 9,187 contracts   The ratio went from 1.31-to-one short to 1.15-to-one long in the last report.

   Large speculators liquidated 3,128 long contracts and added 18,325 shorts over the week under review.  Commercials added 24,528 new longs and added 4,547 shorts.  Small specs and hedgers liquidated 17,710 longs and covered 19,182 shorts.  Open interest fell by 5,497 contracts as prices rallied $0.46/barrel.  We have had increases of 52,000 contracts, 95,773 contracts, and then 12,041 contracts.  Commercials bought 24,528 contracts, large specs sold 18,325 lots, but small traders got out of more.

   The average large speculator has 2,189 long contracts (92 accounts), or 102 more contracts on average on 6 less accounts, and 1,767 shorts (99 accounts), or an average of 83 contracts more on 6 more accounts.  Commercials held 7,776 longs (79) or 16 more longs on average on three more accounts, and 7,682 shorts (86), or 310 more shorts on 3 fewer accounts. Reportables held 4,245 longs (258, dn 3 accts) and 4,570 shorts (244 accts, dn 6).  Average longs were up 95, shorts were up 164.

Heating oil                 40,145                   9,769                           - contracts held by speculators:  4.11 to 1 long

                                         161,122               206,604                              held by the trade.

                                           44,572                 29,466                               held by small specs and hedgers.

Spreads….up 1,408 contracts.    The ratio of large speculative longs to shorts went from 2.49-to-one to 4.11-to-one in 4 weeks.

       Large speculators liquidated 1,096 longs and covered 3,132 shorts.  Commercial accounts added 4,761 longs and added 4,982 shorts.  Small speculators and hedgers added 340 longs and added 2,155 shorts.  Open interest grew by 5,413 contracts as prices rallied 1.74 cents. That looks like decent new buying, which came from commercials.

       The average large speculative long is holding 1,115 contracts (dn 98 lots on 36 accounts, 2 less account), while the average short has 488 contracts (dn 73 lots on 20 accts, dn 3).  The average commercial long is holding 2,557 contracts (up 75 contracts on 63 accts, same) compared to the average short holding of 3,228 contracts (up 126 lots on 64 accts, dn 1 acct).  The average reportable position is 1,971 long (dn 7 lots on 123 accts, up 3) while the average short holding is 2,341 (up 111 lots on 110 accts, dn 4).  The shorts increased their average reportable holdings, on fewer accounts, which shows they have deeper pockets.

Rbob Gasoline           72,308                  9,917                          -contracts held by speculators:  7.29 to 1 long

                                          116,899               185,514                             held by the trade.

                                            20,920                 14,696                              held by small specs and hedgers.

Spreads…up 2,495 contracts   The ratio of large speculative longs to shorts went from 6.75-to-one to 7.29-to-one in 1 week.

     Large speculative holdings fell by 1,615 longs and fell by 1,030 shorts over the latest week. Commercial holdings grew by 10,674 longs and grew by 12,096 shorts.  Small speculators and hedgers’ positions grew by 1,139 longs and fell by 868 shorts.  Open interest grew by 12,693 contracts as prices rallied 10.44 cents.  That looks like new buying, which would be supportive.  The best buying came from commercials, who tend to buy near the end of moves, it seems.  More were selling, though.

   The average holdings are 1,112 contracts for each large speculative long (65) and 472 for each large speculative short (21).  The average commercial long now has 1,480 contracts long (79) and 2,183 short (85). Average reportable holdings are 1,266 long (163) against 1,530 short (139).  Large speculators closed three long accounts, which increased the average holding by 90 lots, and closed four short accounts, which decreased the average short by 49 contracts.  Shorts are in stronger hands.

Naturalgas                80,357               233,720                           -contracts held by speculators:  2.91 to 1 short

                                         294,883               189,931                               held by the trade.

                                           93,175                 44,764                           held by small specs and hedgers.

Spreads…up 10,604 contracts    The ratio of large speculative shorts to longs went from 2.35-to-one to 2.91-to-one in a week.

  Large speculative holdings liquidated 23,212 longs and covered 9,502 shorts over the latest week. Commercial accounts added 17,854 longs, and added 6,759 shorts, while small speculators and hedgers added 1,872 longs and covered 743 shorts.  Open interest grew by 7,118 contracts as prices rallied $0.398/mmBtu.  That looks like new buying and is bullish.  The new buying came from commercials and from spread trades.  Small specs and hedgers were also buying.  Large speculators were also covering shorts.  Commercials were also selling short in this market.

  The average large speculator has 1,044 contracts (77) while each large speculative short is holding 2,782 shorts (84).  The average commercial long now has 3,553 contracts long (83) and 2,922 short (65). Average reportable holdings are 2,739 long (229) long and 3,430 short (197).  Large speculators added three long accounts, which decreased the average long holding by 356 contracts, and added four short accounts, which brought the average down 258 contracts.  The reportable category had 23 more longs on average on the same accounts while the average reportable short held 74 more contracts with 2 fewer accounts.    

Natural Gas & Utility Generation

Natural gas futures were lower again yesterday, marking the fourth straight day that prices have fallen.  On Monday, the story was that gas prices were following oil, and were weak because of a stronger US dollar.  Yesterday, that story would not fly.  And, in earnestness, it is hard to explain away yesterday’s decline.  None of the regular standbys seem appropriate. 

The reason that most observers trotted out yesterday was that ample supplies in storage and poor demand were the culprits.  That’s hardly venturing out on a limb, but we continue to feel that this market is past the point where the same abundant inventories and weak consumption can be seen as anything more than old and largely-discounted news.  As fuel for a market move goes, these provided the power for the decline from $13.69 to $3.15, and have to be largely spent by now.  Frankly, we are happier with the simpler appeal to recent momentum or the charts for yesterday’s weakness. 

And, as long as we are revising the popular excuses for yesterday’s weakness, we feel compelled to revisit Monday.  The reason on Monday was weakness in oil prices, a stronger dollar and slumping equities quotes.  But those look naked and empty after yesterday’s reversal in the reasons without any modification in the natural gas price direction.  It should cut both ways.

In cash trading yesterday, Henry Hub prices were at $3.86-$3.97, down $0.00-$0.09 (DJN).  SoCal prices were at $3.09-$3.27, down $0.06-$0.12 on the day.  El Paso Permian prices were down $0.02 and up $0.01 at $3.18-$3.33.  Katy prices were down $0.00-$0.05 at $3.80-$3.90.  Waha prices were up $0.04-$0.06 at $3.38-$3.48.  Transco 6 was down $0.04 and up $0.01 at $4.26-$4.36/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $31.00-$33.00/mwh.  Northeastern prices last traded at $41.75-$46.50.  Entergy was last at $47.50-$48.50.  Ercot was last at $49.25-$53.25/mwh. 

In our continuing search for reasons for price movements that can hold up under scrutiny (and a reversal in the underlying reasons), we read with interest comments by Dow Jones yesterday.  In its daily gas roundup, it noted that private forecaster WSI was standing firm in its forecast this summer for 11 named storms, six hurricanes and two reaching Category 3 or higher.  While any storm making landfall is a disaster, this forecast follows others that DJN notes are “close to the average seen between 1950 and 2008,” but which are “significantly lower than the numbers from the relatively active seasons of the last 15 years.”   In other words, we may be leaving the extremely active period we have just witnessed, with the attendant calamities of two seasons with double-disasters like Katrina & Rita or Gustav & Ike. 

While Gustav & Ike were never accorded the infamy of their twin predecessors in 2005, only the resurgent dollar and steep decline in oil prices last summer were able to prevent them from being recorded as nearly equally horrifying calamities.  They certainly idled their share of refineries, oil and gas wells.  Had the storms arrived in June, instead, we can only imagine how high prices might have been at the peaks last July.  If they represented the height of a 15-year period of increased activity, traders could be excused for breathing a collective sigh of relief.  But, we still feel that prices are trying to construct a bottom.

Support is at $3.82-$3.86, $3.65-$3.68, $3.55-$3.58, $3.43-$3.47, $3.38-$3.39, $3.33-$3.34, $3.25-$3.26, $3.15-$3.17, $3.10-$3.14, $2.88-$2.91, $2.83-$2.84, $2.74-$2.75, $2.64-$2.66 and $1.85-$1.88.  Resistance is $3.98-$4.01, $4.15-$4.16, $4.31-$4.33, $4.38-$4.39, $4.53-$4.56, $4.65-$4.69, $4.85-$4.88, $5.01-$5.03, $5.22-$5.24, $5.55-$5.57, & $5.62-$5.64. 

Natural gas prices were lower yesterday, despite a rally in oil prices.

Dollars per million Btu

Jun Natural Gas:          Support:        $4.03-$4.06, $3.82-$3.84, $3.65-$3.68, $3.57-$3.60, $3.43-$3.46, $3.33-$3.36.

                                                    Resistance:    $4.15-$4.16, $4.31-$4.33, $4.38-$4.39, $4.06-$4.07, $4.13-$4.14, $4.24-$4.26.

EIA Weekly Storage Figures

Last week’s EIA report showed a build of 114 bcf on expectations for a build of 104 bcf.  Stocks are now 622 bcf higher than a year ago, against a surplus of 568 bcf a week ago, a surplus of 546 bcf two weeks ago and a surplus of 524 bcf three weeks ago.  Stocks are now 32.14% higher than a year ago.  They are 472 bcf and 22.64% above the five-year average.

The five-year average for this week was a build of 83.0 bcf.  The eight-year build average was 92.25 bcf.  Last year, there was a build of 90 bcf.  Those are based on similar Friday’s, not the same dates.

EIA Report

Bcf, or Billions of cubic feet.  Source:  Energy Information Administration, US Department of Energy

News & Views

Last night’s API report showed a smaller-than-expected draw in crude oil stocks and larger-than-expected builds in refined products stocks.  The capper was a brace of poor demand figures for distillate and gasoline and a surge of 1.9% in refinery utilization. 

An Illustrated Look at Energy Market Factors

A Look at Speculation & Legislation Concerning It

The Senate Permanent Subcommittee on Investigations concluded a yearlong investigation into price movements and the composition of the wheat market from 2006 through the middle of 2008, a period in which prices advanced steeply.  In its 247-page conclusion, the panel said that “rampant speculation … is ruining the price hedging system used by the farm sector, which can translate into higher prices for food manufacturers and consumers,” according to Dow Jones.

The subcommittee blamed the CFTC for allowing index traders “to go well beyond normal buying limits.”  The subcommittee’s chairman, Senator Carl Levin (Michigan) said, “The CFTC helped create the problem by allowing some index traders to exceed the standard limit on the number of wheat contracts that traders are supposed to be able to hold at any one time.” 

Traders are supposed to be restricted to trading 6,500 contracts.  But, in one instance, a trader controlled 53,000 contracts.  Six index traders were allowed to control 130,000 contracts.  The report noted, “… six traders granted waivers from trading limits may have held up to about 60% of all the outstanding wheat contracts held by index traders.”  The huge positions prevented cash and futures from converging at expiration, which destroys the value of hedging by commercial interests.  And farmers reacted to higher prices by planting a record amount of wheat, which “led to a flood of soft red winter wheat hitting the market at harvest,” at which time the index traders had gotten out and prices had collapsed because of the recession. 

Comment: This has clear implications for the oil markets.  Over the last year, prices have been too high and too low and they have sent signals to producers and consumers that may have more to do with currency fluctuations than with the supply and demand for oil.  Speculators are absolutely necessary for any commodity market to function, but speculators have always been expected to take long and short positions in almost equal numbers.  The index funds have changed that dynamic and stood it on its head.  Convergence is as important in commodity markets as having speculators is, and one cannot factor out the other without grim consequences.  Many of those trading index funds should be investing in oil or agricultural companies rather than “investing” in futures.  That is an altogether better use of investment money, facilitating drilling, exploration, refining and storage (or planting, harvesting and marketing) rather than betting on direction without any understanding of commodity market fundamentals.  The CFTC wants to limit traders to stricter position limits, and we think it makes sense.  Investors should be investing and should leave speculating to those who are willing to both buy and sell short, as bona fide speculators have always done.  Food and fuel are too critical to our economy for unlimited positions held by investors to become onerous forms of taxation on consumers that will inevitably lead to recession, inflation or both.

A Look at the US Dollar Versus the Euro

Dollar-Euro (dollar in euro cents):  Three-Month Bar-Chart  The US dollar dropped sharply yesterday, and it failed to advance at a critical point on the charts above.  We had a brief breakout from a head & shoulders bottom last week, but it quickly turned back down, again, and it needs to break and settle above the recent high (signified by our green arrow) in order to confirm the upside breakout.  Prices are halfway between those highs and major lows, and a break below the low at support just under 70.00 euro cents, around 69.75 would be bearish.  The bulls have lost a major opportunity to solidify an advance.  And that could affect oil prices.

Source:  http://www.advfn.com/p.php?pid=forexqkchart&curcode1=USD&curcode2=EUR

A Look at Jet Fuel Prices

Differentials against heating oil futures have started to rise recently, but they are still near the lower end of their historic range.  We like locking in anything near or under four cents a gallon over heating oil futures.

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